Former PHD vendors sue in effort to recoup $2.8M

Unsecured creditors in the bankruptcy case of PHD Inc. of Wickliffe, a now-defunct distributor of household appliances, are suing to recover more than $2.8 million they say Bank One and one of its subsidiaries wrongfully received during the bankruptcy process.
The unsecured creditors, including well-known companies such as Bunn-O-Matic Corp., Remington Products Co. and Sunbeam Corp., filed their amended complaint Dec. 1 in U.S. Bankruptcy Court in Cleveland. The companies are vendors that supplied products to PHD, which distributed the products to retailers such as Wal-Mart, Kmart and Amazon.com.
According to the complaint, in the three months leading up to PHD's Chapter 11 bankruptcy filing on Jan. 29, 2003, Bank One and PHD's owners led the vendors to believe the company was in better financial shape than it actually was so they would continue to ship products.
During that time, the vendors allege in the complaint, Bank One representatives and PHD's management told vendors that PHD was on track to earn a profit for 2002 and in September of that year had received an extension on a $26 million revolving loan to provide it capital through June 30, 2004.
However, the opposite was true, the vendors claim. PHD overstated its inventory by at least $6 million, was facing a loss in 2002, and Bank One already had decided to cancel the company's revolving loan, according to the complaint.
The vendors continued to ship products and extend credit to PHD, apparently unaware of the pending bankruptcy, and subsequently lost more than $2.8 million when PHD's assets were transferred to Bank One and Banc One Capital Partners LLC to pay off secured debts, the complaint stated. Banc One Capital Partners primarily makes subordinated loans to borrowers.
Secured creditors such as Bank One receive priority over unsecured creditors for repayment of debts during bankruptcy cases.
'The secured creditors received 100% payment, but very little was left for the unsecured creditors,' said Hahn, Loeser & Parks attorney Mark Staib, who represents the unsecured creditors. 'Through this complaint, we are seeking to bring to the court's attention the reason why the secured creditors shouldn't be entitled to money' owed to PHD's former vendors, Mr. Staib said.
Named as defendants in the complaint are the Cleveland office of Bank One National Association and the Columbus office of Banc One Capital Partners. The company's owners, private investment firms Stonehenge Financial Holdings Inc. and Bluestone Investors LP of Columbus, and several individual investors also were named as defendants for their role in allegedly misleading vendors about PHD's financial condition.
PHD and three subsidiary companies had sales of nearly $100 million in 2002. After filing its Chapter 11 petition last January, the company went out of business in February 2003 and now is in liquidation.
A Bank One spokesman declined to comment on the case, saying the company doesn't discuss pending litigation. Representatives from Stonehenge and Bluestone did not return one voicemail message left with each firm seeking comment.
The case has been transferred to U.S. District Court in Cleveland and is pending before Judge Ann Aldrich.